2015Q2 Forecasts for the Philadelphia Federal Reserve Society

The decline in first quarter GDP was due to a number of factors, but two in particular were most important.  The first was a substantial widening of the U.S. trade deficit as the strong dollar and West Coast port strike demolished U.S. exports.  The worsening of the trade balance reduced GDP growth by 2.0 percent all by itself.  The second cause of first quarter weakness was a slowdown in consumer spending, only some of which was related to the harsh winter in the Northeast.  More substantially, households cut spending and increased savings, with the savings rate in the first quarter hitting its highest level in more than two years.

2015Q2 Forecasts for the Philadelphia Federal Reserve Society of Professional Forecasters

RCF Vice-President Peter Bernstein is a member of the Philadelphia Fed’s Society of Professional Forecasters.  Here are the 2015Q2 forecasts he submitted in May, along with a look at his 2015Q1 forecasts and recent historical data.

Economy Already Rebounding from First-Quarter Decline

The decline in first quarter GDP was due to a number of factors, but two in particular were most important.  The first was a substantial widening of the U.S. trade deficit as the strong dollar and West Coast port strike demolished U.S. exports.  The worsening of the trade balance reduced GDP growth by 2.0 percent all by itself.  The second cause of first quarter weakness was a slowdown in consumer spending, only some of which was related to the harsh winter in the Northeast.  More substantially, households cut spending and increased savings, with the savings rate in the first quarter hitting its highest level in more than two years.

While increased savings temporarily depresses the economy, the resulting improvement in household finances sets the stage for stronger growth in the future.  In the second quarter, we have already seen stronger consumer activity with improved data on store sales, auto purchases, and home buying.  The job market continues to recover and wage growth has been picking up, further increasing household incomes.  Altogether, we think consumer spending will increase considerably as the year unfolds and expect the second half of 2015 to be much stronger than the first.  With that in mind, we also expect the Federal Reserve to start raising interest rates during the second half of this year as well.

This view is reinforced by the sharp increase in the 10-year Treasury yield over the past few weeks.  Typically, bond yields fall when the economy weakens, so the 60 basis point jump in the 10-year yield since mid-April indicates that the markets are looking past the first quarter weakness and also expect stronger growth ahead.

Click here to see an Excel version of our 2015Q2 forecasts:
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